In the past 12-18 months rural economy has seen improved strength pointed out S Krishna Kumar, CIO, Equity, Sundaram MF in an interview to CNBC-TV18. Across staples, discretionary products, rural demand will recover, which will surprise the Street, he said.
Further, there is a likeliness of good monsoon this year. This, along with measures such as crop insurance, among others, will significantly uplift rural incomes, he added.
The market on Tuesday trimmed some of its early morning decline as other index heavyweights cushioned the loss from ITC and Reliance Industries.
ITC fell over 13 percent intraday after the GST council raised cess on cigarettes.
Sundaram Mutual Fund believes there could be a de-rating on the stock going forward. But, like other stocks, it could become attractive again.
The fund house believes the market will be continuously positively biased. Domestic savings were better and a lot of money was coming into the domestic market.
Having said that, one has to watch out for the earnings trajectory. “Internal estimates in terms of growth for the year indicate that broader markets will see 16-18 percent earnings growth. For June, we don’t have a significant negative view on earnings,” S Krishna Kumar, CIO, Equity, Sundaram MF told CNBC-TV18 in an interview.
Further, he said the current quarter witnessed de-stocking, but there is a good demand pull seen in the second quarter.
What should the market be cautious about?
Kumar highlighted that there is a lot of fundraising coming through from QIPs, IPOs, and disinvestment, among others. “Next 12 months could see Rs 1-1.5 lakh crore of issuances coming through which will sponge out money coming into the market. This could slow down the pace of returns,” he told the channel.
He said the fund house has been very selective on banking and looking at banks with parameters such as good capital adequacy. “Overall, we continue to believe that PSU banks remain a medium-term trade,” he added.
Below is the verbatim transcript of the interview.
Anuj: What are your thoughts on whether we could see a bit of a de-rating in ITC from hereon as well which could have a larger impact on the market?
A: I think clearly, this move will de-rate the cigarette space broadly and some of these stocks and segment have seen a P/E multiple rerating also given the improved visibility on the growth etc. So to the extent you are already seeing some impact on the stocks. However, at some price, the stocks do become attractive again. So we will definitely wait for better value here given that ITC is just about cigarettes, there are other parts of the business also to ITC at large.
Latha: A more general question on the economy or on consumption stocks. ACC and Jubilant Foodworks are indicating that consumption is coming back at various levels. Is that a theme that we should take seriously?
A: We have been very positive on the consumption space overall. What is happening now is that in the last 12-18 months, rural economy is also seeing a lot more improved strength, so we believe that across staples, across discretionary products, we will see that rural demand recovers pretty sharply, which would be a bit of surprise for the markets. So I think this year also we have a fairly good monsoon that is predicted. So consecutively good monsoons supported by the strong measures taken by the central government on the crop insurance came and also on better price discovery through the network of agricultural mandis, I think it is going to have a significant uplift to rural incomes.
We are also seeing a huge amount of thrust given by the government on affordable housing both in urban areas and in rural areas particularly. So Prime Minister’s Office (PMO) keeps monitoring this on a regular basis and that is a flagship programme for the next couple of years.
So we believe that – you also mentioned about cement – cement is definitely going to be a significant beneficiary of the improved outlook on the housing space. Also, from the infra projects that are being kicked off, there could be a lot of demand. So overall consumption as a theme if one which will be very secular and will take the markets and the economy to the next level over the next 10 years definitely.
Reema: Markets often need an excuse to correct. Today ITC could have provided it but the markets are holding up pretty well except ITC. Should we brace ourselves for a steep correction, what is your own sense about the downside for the markets from hereon?
A: Our internal estimates in terms of growth for the year clearly indicate broader market growing within 16-18 percent in terms of earnings growth. The first quarter is also something that we do not have a significant negative view in terms of earnings growth. We do believe that there will be a single digit kind of earnings growth ex of oil. So we aren’t very much worried about the pace of earnings growth at this point in time.
We do believe that there was significant de-stocking in the first quarter which will also mean there will be good demand pull on Q2 when the retail chain, the supply chain stocks up so that is not a big worry in terms of goods and services tax (GST) implementation impacting earnings. That will come back.
Also the fact that, we are at valuations which are probably pricing in this kind of growth, so one has to be carefully monitoring the earnings trajectory and the recovery across different sectors so as many experts say it has been a patchy kind of earnings growth in the last couple of years impacted by various transitions and economy did due to policy measures like asset quality review (AQR) provisioning or the Ind-AS changes etc. which all had some amount of impact in terms of how the numbers were coming through.
So we believe that markets would continue to be positively biased. We believe the domestic savings is channelling itself into the markets given that the expectations on returns post tax is just about 10-12 percent which should be a very comfortable number. So a lot of money is coming into domestic markets to support. So that is not a big worry.
The only point of caution I would like to leave you here is that there is a lot of fund raising that is going to come through be it the public sector undertaking (PSU) divestments or there are big initial public offerings (IPO) from the insurance companies of the government followed by the fund raised by the banking, financial services and insurance (BFSI) space on the private sector, other qualified institutional placements (QIP) and funds that will be raised for further growth capital. So overall our belief is that the next 12 months could see about 1-1.5 lakh crore of primary issuances coming through and that would sponge out significant portion of the money coming into the markets.
So the money which comes into the secondary markets could be that much more muted than the last 12-18 months, which could slow down the pace of returns from here. So one would probably need to factor in that. We have already moved up some 25 percent from in the current calendar year, so the second half could be a lot softer than the first half in terms of returns.
Overall we do not see any significant correction but the uptrend could be a lot slower and consolidate and move forward. That is my personal expectation.
Latha: What are your views on the banking stocks? We have seen this judgement coming in from the Gujarat High Court. Now are you getting positive on public sector bank stocks or were you already?
A: I think over the last six-twelve months, PSU banks are being in a bit of a trade reacting to a lot of positive developments from the ministry and from the RBI with interest rates also coming off. So we have been directionally increasing our exposure to the PSU banks but been very selective because we are trying to only get into banks which have good capital adequacy and which are also fairly high on provision coverage etc. so that you do not have too much of incremental spike in credit cost basically. So banks which have more or less recognised stressed and where provisioning is also keeping pace with adequate capital. That is where our comfort is. But overall, I would still continue to believe that PSU banks would remain largely a medium-term trade to get structurally positive. We need to go through the top of this current stress resolution and see what remains in terms of banks etc because we also believe that consolidation will be the next phase in PSU banks which will again bring in some amount of volatility in terms of which banks gets merged with which one and what is the impact on numbers. So the space is going to see some action but we need to be quite cautious.
Anuj: You are known for picking a lot of midcap gems. I was talking to you about GST beneficiaries. Some of your portfolio stocks have shown that but anything else in terms of your themes that is adding to your funds in terms of GST beneficiaries?
A: There has been a lot of debate on the GST beneficiaries basically. So I would like to put it in this manner that overall there would be a significant benefit to the corporate sector from better working capital, better logistics and warehousing cost coming down. So there would be a lot more benefits across the board on the logistic freight and warehousing cost for companies. Already many companies have started to dismantle the several warehouses that have been there taking advantage of GST. So that is one big benefit across the board.The second benefit comes from the savings on working capital, the release of capital there which is very generic and also the other big generic benefit would be that there has been a fairly big unorganised sector that has been eating away market share in different sectors. A lot of it would be the ones where there is a fairly long bit of supply chain to the customer and you have seen a lot of local regional players who have been there from the building material space to the automotive spare parts retail chain to garments, to restaurants, to other services, there is a huge amount of the unorganised or the semi-organised economy. So as it folds up, or folds into the organised space, the current incumbency would be completely benefited by either market share consolidations or by better margins as the unorganised players incur higher cost. So I think it is quite a generic theme basically whereas you can pick some of these sectors which we talked about where the unorganised sector is high but broadly every company stands to gain and it is going to definitely add to your earnings growth by 2-3 percent at the minimum over the next couple of years.